Elasticity of economic beliefs

Bryan Caplan writes,

If you’re even mildly Keynesian, you know that downward nominal wage rigidity occasionally leads to lots of involuntary unemployment. If, like most Keynesians, you think that your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment. The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.

Links omitted. Read the whole post. My thoughts:

1. In my long essay, which is worth re-reading, I write,

it is politically consistent for someone on the left to believe that a rise in the minimum wage would not reduce hiring and also that more immigration would not depress wages. Analytically, however, these are opposite views. The minimum-wage increase will not reduce hiring if one treats labor demand as highly inelastic (so that a small change in hiring will be associated with a given change in wages). Increased immigration will not depress wages if one treats labor demand as highly elastic (so that a large change in hiring will be associated with a given change in wages). I think we are already starting to see economists opt for political consistency at the expense of analytical consistency.

2. On the point about downward rigidity of nominal wages as essential for unemployment, that has long been controversial. The mainstream view, particularly in textbooks, is that downward wage rigidity is important. But often it is difficult in the data to find the movements in real wages that would one expect to be associated with fluctuations in employment. And some Keynesians (including Keynes himself) have claimed that rapid wage reductions in a time of high unemployment would not reduce unemployment.

I do not wish to revisit the Keynesian macro controversy here. My main point is that economists are willing to take analytically inconsistent positions in order to remain politically consistent. Bryan wants to call them on it, but I think that the trend is against him.

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7 Responses to Elasticity of economic beliefs

  1. Andrew' says:

    They are for taking the popular position and then never testing the analytical question. Why seek out bad news?

  2. Collin says:

    What the upward rigidity of wages as that appears to be happening today? There are all kinds of stories businesses are having trouble hiring at a ‘fair wage’

    Otherwise, our estimation of falling wages was larger because most workers had huge cuts to health benefits

  3. Andrew' says:

    They seem to rely heavily on the causal density resulting in difficulty showing significant changes at the modest margins usually offered by policy proposals. As an engineer, I say we should raise it to $30 an hour and really find out.

    • Andrew' says:

      I think the new news, which may be the old news if Keynes meant it to begin with, is that wage reductions are deflationary due to other nominal rigidities (e.g., debts). Perhaps the problem was they fixated on laborn because that is who they are.

  4. Handle says:

    Out of curiosity, has any mainstream progressive economist taken up Caplan’s challenge and tried to show that those positions are analytically consistent?

    I don’t know if you read angus and mungowitz at Kids Prefer Cheese but they’ve been urging, um, rhetorical and analytical restraint on the part of non-leftist economists on that issue for years.

  5. Derrill Watson says:

    An attempt to square their circles:
    So we’ve got a kinked demand function (an imperfect L) and a backward-bending supply function. Increases the minimum wage do little to create unemployment and increases in supply do little to lower wages.

  6. spencer says:

    The question is not does minimum wage hurt employment. The argument is how severe is the impact and how does it compare to other influences in the labor market.

    The “liberal” research is that minimum wages have a very small impact and that it is usually swamped by other factors.

    Even the quantitative research by opponents of the minimum wage find that the impact on employment is small and the impact on income more than offset that negative factor.

    I never see any of the blog post from GMU economist that even address the impact on income. Their analysis is extremely bias because they appear to deliberately ignore other factors like income.

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